Inflation and poverty

The rate of inflation is rising higher . From a little over 2 per cent in the early nineties, the rate of inflation , according to the latest available official estimate of it, is some 7.68 per cent or in the neighbourhood of 8 per cent. Thus, even by official admission, the rate of inflation is near the double digit. But this official estimate of inflation is considered to be a conservative one. According to most of the reliable private estimates, the rate of inflation is already above the double digit.
Thus, it should be easy to understand what a leading economist of the country meant in a recent seminar where he stated that inflation is putting on a reverse the gains that were made in the struggle against poverty in the decades of the eighties and nineties. Poverty alleviation in large measure boils down to people having more disposable incomes in their hands after buying the basic necessities for survival. But disposable incomes for the greatest number in the population– who have an existence below the poverty line or close to it– have been dwindling down progressively. In many cases, people are not having any disposable income left after buying the bare consumption goods for daily living or paying the charges of essential services at costs that have been going up and up without a pause. They are finding it difficult to cope with the costs of living from their income and have resorted to borrowing or turned indebted in many cases.
Rising prices or charges respectively for goods and services(described as inflation) are not problems in a setting where the money income or disposable income of people also tend to rise well above the rate of inflation that leave people with their purchasing power intact or in better positions. But this has not been the case in Bangladesh. Here, inflation has been rising steadily but purchasing power has not even caught up with the rate of inflation not to speak of overtaking the rate of inflation. Thus, in many cases, people have been worse off with their eroded purchasing power.
Savings and investments are the stepping stones to economic advancement and it can mean both individual economic advancement and national economic advancement. A man who patiently saves taka one million over a period of ten years to see the value of his saving halved or less by inflation, will not progress far in doing things of value with the saved amount. In fact, repeated such experiences might even turn off his desire to save. Nationally, the cumulative decline in the value of savings of individuals means much less institutionally saved amounts available to undertake investment activities adequately to give a spur to economic growth. The rate of inflation needs to be on the low side for the full cycle of savings and investments to turn successfully. This is as much true for the individual as it is for the national economy. For example, let us take the above example of the person who has saved taka one million over a period of say, five years, with the aim of ultimately building a house . The motivation of this person to go ahead with his plan after five years will remain if he finds out at that stage that the value of one million taka in constant prices is nearly the same after five years. If, on the contrary, he finds that the value of taka one million is half of what it used to be five years ago or this amount of money will now buy only half of the construction goods needed because of rise in their prices whereas he could buy double the goods with the same amount of money five years earlier, then he may feel demotivated enough to give up his plan.
What such cases can mean for the economy ? A house to be constructed by the individual is not only an individual decision. It has implications for the economy as well. A decision to build the house means creation of demand for construction materials as well as their actual purchases, employment of workers, financing activities by financial institutions and other activities of an economic nature. But the economy would be denied the benefits of all of these activities and demand once the decision to build the house gets cancelled and the cancellation is due to price rise or inflation. The example of the house is only an example. There can be hundreds of thousands of such cancelled decisions of a diverse nature affecting adversely overall economic growth or the national economy from the lower level of investments. It is not unusual in some countries to encourage calculated and controlled circulation of money to trigger increased economic activities and hence added output, employment, etc. But the Bangladesh government is under a pressure from donor organizations like the International Monetary Fund (IMF) and the World Bank (WB) to go for tighter monetary controls out of a thinking that increased money supply has been the main reason for the rising inflation in Bangladesh . But this thinking excludes other ‘peculiar factors’ in the Bangladesh context such as hoarding, unjustified and arbitrary actions of middlemen in substantially raising prices of essential commodities, etc., that have no relationship with the increased supply of money. Therefore, it is doubtful whether the Bangladesh Bank and the Finance Ministry can tame inflation by relying excessively on monetary controls or reducing money supply. Indeed, the goal of greater economic activities is likely to be adversely affected by such restrictive policies related to financing needs of businesses . Therefore, instead of limiting money supply, it should be more reasonable and useful to deal with the peculiar factors mentioned above. It is also very necessary to address the cost-push factors which are contributing so much and directly to the inflationary process. The government, through dictated prices, has gone on increasing the prices of energy and other utilities that have added directly to costs of production, distribution and marketing of a wide range of products and services. It is really in these areas that application of policies would be significant to take the wind out of the sails of inflationary spirals.
The rate of inflation is considered to be a very important macro economic indicator. It influences not only individual investment decisions of the type like the one of building a house, but also the gamut of investment activities in the sphere of business. It significantly affects the decisions of foreign investors. Investors want to be happy about the rate of returns. The rate of inflation that remains low and steady over the long haul serves as an incentive for investors. If the investors feel assured that costs of production will remain stable in the long run from non volatile costs of the factors of production, then they can expect to remain competitive and earn good profits. Investors feel inspired when they are convinced that the value of the profits they are making will continue to hold steady and not erode drastically over the medium and long terms.
Considering all of these and more, it is imperative for the government to do far better than it so far has, to bring inflation under a tight leash with an appropriate blend of policies.


Top